Worker Can’t Sell Court On Employee Status

Ninth Circuit Rejects Sex Discrimination Suit

A federal appellate court recently dismissed a lawsuit brought by an insurance agent who sued for sex discrimination in violation of Title VII of the Civil Rights Act. According to the Ninth Circuit Court of Appeals, the insurance agent was an independent contractor and not an “employee” entitled to the protections of Title VII because she controlled the manner and means by which she sold financial products. Murray v. Principal Financial Group, Inc., No. 09-16664, Ninth Circuit Court of Appeals (July 27, 2010).

Factual Background

Patricia Murray was a “career agent” for Principal Financial Group, Inc., Principal Life Insurance Company and Princor Financial Services Corporation (Principal), selling financial products and services. Murray filed a lawsuit in federal court against Principal alleging sex discrimination in violation of Title VII. The trial judge granted summary judgment in Principal’s favor, holding that Murray was not an employee of the company. Murray appealed, arguing that she qualified as an employee because Principal exercised sufficient “control” over her work.

Legal Analysis

The issue before the Ninth Circuit was whether Murray was an independent contractor or an “employee” under Title VII. The court found that the U.S. Supreme Court intended its common law test, pronounced in Nationwide Mutual Insurance Company v. Darden, to control whenever an employment statute defines “employee” in the same way it is defined in the Employee Retirement Income Security Act (ERISA). Since both ERISA and Title VII, the Ninth Circuit noted, define “employee” as “an individual employed by an employer,” the court ruled that the Darden test applies to this case.

Under Darden, to determine whether a worker is an independent contractor or an employee for Title VII purposes courts should evaluate “the hiring party’s right to control the manner and means by which the product is accomplished.” The relevant factors in making this determination are:

• The skill required;
• The source of the instrumentali-ties and tools;
• The location of the work;
• The duration of the relationship between the parties;
• Whether the hiring party has the right to assign additional projects to the hired party;
• The extent of the hired party’s discretion over when and how long to work;
• The method of payment;
• The hired party’s role in hiring and paying assistants;
• Whether the work is part of the regular business of the hiring party;
• Whether the hiring party is in business;
• The provision of employee benefits; and
• The tax treatment of the hired party.

The Ninth Circuit found that several of these factors “strongly favor classifying Murray as an independent contractor.” According to the court, Murray was free to operate her business without intrusions. Murray decided when and where to work (including maintaining her own office), she scheduled her own time off and was not entitled to vacation or sick days, Murray was paid on commission, she reported herself as self-employed to the IRS, and Murray sold other products.

The court also found that several factors support Murray’s argument that she was an employee. For example, Murray received some benefits, had a long-term relationship with Principal, possessed an at-will contract, and was subject to minimum standards imposed by the hiring party. However, the court concluded that these factors are not sufficient “to overcome the strong indications that Murray is an independent contractor.” Because Principal did not control the manner and means by which Murray sold their products, the court held, the “overall picture presented by Murray’s relationship with Principal” is one of an independent contractor. As a result, her case was dismissed.

Practical Impact

According to a shareholder in Ogletree Deakins’ Orange County, California office: “Employers now have a clearer understanding of the appropriate standard for independent contractors. Of course, whether someone is an independent contractor has dire consequences if an employer gets it wrong. Misclassification impacts a whole host of employment laws, not just whether someone is covered by Title VII, as in this case. In California, for example, liability for the misclassified can easily mushroom into overtime, meal and rest period, check stub reporting and withholdings violations, as well as impacting unemployment insurance and workers’ compensation.”

Watts continued: “The practical effect is that employers must do their due diligence to determine whether an individual really is an independent contractor. Despite this case, courts are increasingly hostile to the independent contractor arrangement, even where the individual and the company desire such a relationship. Employers should immediately evaluate any independent contractor relationships they have and whether and to what extent they control the manner by which an individual performs the work, provides tools and equipment, requires a set work schedule, or has the individual performing the same work employees perform.

“Getting your house in order goes a long way towards avoiding future liability. Think of it this way – no one is suing you now – at least not yet. Be proactive and get out in front of what might become a much bigger problem later.”

Note: This article was published in the September/October 2010 issue of The Employment Law Authority.